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INCOME TAXES
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
INCOME TAXES

25. INCOME TAXES

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. Significant components of the Company's deferred tax assets are as follows:

 

    2020     2019  
Deferred tax asset:                
Allowance for doubtful accts   $ 359,598     $ 163,123  
UNICAP     9,904       16,314  
Obsolete inventory     2,811       41,131  
Reserves     —       1,641,874  
Warrant liability     —       2,330  
Accrued compensation     138,283       89,089  
Credit carryforwards     142,484       142,484  
Stock compensation     880,766       430,274  
Fixed assets, net     483,923       1,278,863  
Contribution, carryforward     70       62  
Accrued interest expense     68,148       22,414  
Net operating loss carryforwards     5,912,511       11,602,532  
Lease liability     798,047       899,722  
Credit loss     559,593       995,184  
Accrued expenses     461,973          
Excess of capital losses over capital gains     123,297          
Total deferred tax asset     9,941,408       17,325,396  
                 
Deferred tax liability:                
ROU assets     (756,204 )     (870,886 )
Intangible assets, net     (160,318 )     (209,044 )
State taxes     (1,119 )     —  
Total deferred income tax liabilities     (917,641 )     (1,079,930 )
                 
Net deferred income tax assets     9,023,766       16,245,466  
Valuation allowance     (9,037,861 )     (16,308,197 )
Deferred tax asset (liability), net   $ (14,095 )   $ (62,731 )

 

At December 31, 2020, the Company had Federal net operating loss carry forwards (“NOLs”) for income tax purposes of approximately $18,568,667 after applying the §382 limitation. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) signed in to law on March 27, 2020, provided that NOLs generated in a taxable year beginning in 2018, 2019, or 2020, may now be carried back five years and forward indefinitely. In addition, the 80% taxable income limitation is temporarily removed, allowing NOLs to fully offset net taxable income. In accordance with Section 382 of the Internal Revenue Code, the future utilization of the Company’s net operating loss to offset future taxable income is subject to an annual limitation as a result of ownership changes that have occurred previously. Management believes that such an ownership change may have occurred at various points in 2019 and 2020. The Company has estimated the Section 382 annual limitation due to this ownership change to be approximately $41,969,444. This has been used to reduce the amount of the net operating losses for which deferred tax assets have been recognized as of December 31, 2020.

 

At December 31, 2020, Microphase, an entity not consolidated for income tax purposes, had NOLs of approximately $1,949,316 after applying the §382 limitation. NOLs generated in a taxable year beginning in 2018, 2019, or 2020, may be carried back five years and forward indefinitely. In accordance with Section 382 of the Internal Revenue Code, the future utilization of the Company’s net operating loss to offset future taxable income have been limited as a result of ownership changes that have occurred previously.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax assets, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the information available and due to the last five years significant losses there is substantial doubt related to the Company’s ability to utilize its deferred tax assets, the Company recorded a full valuation allowance of the deferred tax asset. For the year ended December 31, 2020, the valuation allowance has decreased by $7,270,336.

 

The 2016 through 2019 tax years remains open to examination by the Internal Revenue Service (“IRS”), the California Franchise Tax Board (“FTB”) and the Connecticut Department of Revenue (“CDR”). The IRS, FTB and CDR have the authority to examine those tax years until the applicable statute of limitations expires and the years with net operating loss carryovers when such carryovers are used.

 

As of December 31, 2020, the Company’s foreign subsidiaries had accumulated losses for income tax purposes in the amount of approximately $2,977,113. All of the Company’s international accumulated losses were generated in the United Kingdom and Israel which have statutory tax rates of 19% and 7.5% respectively. These net operating losses may be carried forward and offset against taxable income in the future for an indefinite period.

 

The net income tax benefit consists of the following:

 

    2020     2019  
Current            
US Federal   $ —     $ —  
US State     —       —  
Foreign     24,842       —  
Total current provision     24,842       —  
Deferred                
US Federal     —       —  
US State     —       —  
Foreign     (48,636 )     (108,293 )
Total deferred benefit     (23,794 )     (108,293 )
Total provision for income taxes   $ (23,794 )   $ (108,293 )

 

The Company’s effective tax rates were 0.1% and 0.4% for the years ended December 31, 2020 and 2019, respectively. During the year ended December 31, 2020, the effective tax rate differed from the U.S. federal statutory rate primarily due to the change in the valuation allowance and the effect of changes in tax rates in future periods. The reconciliation of income tax attributable to operations computed at U.S. Federal statutory income tax rates of 21% to income tax expense is as follows:

 

    2020     2019  
Expected federal income tax benefit     21.0 %     21.0 %
Beneficial conversion feature     (0.1 %)     (0.6 %)
Deconsolidation of I.AM     1.5 %        
Loss on extinguishment of debt     (9.8 %)        
State taxes net of federal benefit     8.1 %     3.5 %
Foreign rate differential     (0.3 %)     (0.2 %)
Section 382 limitation     (34.7 %)     —  
Return to provision adjustment     (7.8 %)        
Effect of change in valuation allowance     21.1 %     (21.9 %)
Other     1.1 %     (1.4 %)
Income tax benefit     0.1 %     0.4 %

 

The Company accounts for uncertain tax positions in accordance with ASC No. 740-10-25. ASC No. 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC No. 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. To the extent that the final tax outcome of these matters is different than the amount recorded, such differences impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense. ASC No. 740-10-25 also requires management to evaluate tax positions taken by the Company and recognize a liability if the Company has taken uncertain tax positions that more likely than not would not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated tax positions taken by the Company and has concluded that as of December 31, 2020 and 2019, there are no uncertain tax positions taken, or expected to be taken, that would require recognition of a liability that would require disclosure in the financial statements.